How is high speed computer stock trading taxed?

[Stephen Tashi]

In the USA, ordinary citizens pay different tax rates for "long term capital gains" versus "short term capital gains". What rates do organizations that do high speed stock trading with computers pay? Are all their profits short term capital gains? Or do they establish themselves as businesses in way that the short-term versus long-term distinction is no longer relevant?

 

[Vanadium 50]

Are all their profits short term capital gains?

Yes.

Or do they establish themselves as businesses in way that the short-term versus long-term distinction is no longer relevant?

Income is profit minus losses. So they pay a tiny fraction of gains since it is largely offset by losses.

 

[Office_Shredder]

Rather than keeping track of the profit of each individual trade, there's a tax option where you just figure out how much money you made each year by marking all your positions to the current market prices and pay taxes on it as ordinary income without worrying about where it came from.

 

[phinds]

Rather than keeping track of the profit of each individual trade, there's a tax option where you just figure out how much money you made each year by marking all your positions to the current market prices and pay taxes on it as ordinary income without worrying about where it came from.

That doesn't make any sense. You have to have a cost basis so it most certainly matters "where it came from".

 

[Office_Shredder]

That doesn't make any sense. You have to have a cost basis so it most certainly matters "where it came from".

You don't really. Let's say on January 1st 2019 you have -$200, 1 share of aapl and 1 share of amzn,. Aapl is trading for 100 and amzn 800. Then the net value of your portfolio is 700 dollars.

Now on January 1st 2020 let's say you have 1200 dollars, 2 shares of aapl and are short 1 share of amzn. Aapl is trading for 150 and amzn 700. Not the net value of your portfolio is 800 dollars. So you made 100 dollars in profit, and pay taxes on that.

Again, this is just one option companies can choose for how to pay taxes. It basically means you pay short term capital gains taxes on everything, even on positions you haven't closed yet. But if all your gains are short term anyway, and you turnover your positions so fast that you have realized most of your gains already by the end of the year, the tax inefficiency is almost zero and the accounting simplicity is enormous.